In a new report, Goldman Sachs analyst Francesco Garzarelli explains why the firm believes that government bonds remain too expensive to serve as effective hedges against a falling stock market. For now, traders should look elsewhere for return until the U.S. Treasury curve steepens over the next several months.

The Price Must Be Right

While Treasury bonds have historically been good hedges against a falling stock market, Garzarelli believes that high bond prices were the reason why bonds served as a poor hedge during the S&P 500 pullback this summer. He believes that there is not enough incentive to prefer the volatility of bonds over the relative safety of cash at recent prices.

“Even factoring in the (relatively small) downgrade our economies recently announced to 2016 nominal GDP growth, intermediate maturity Treasuries still look stretched on current valuations,” Garzarelli explains.

Fed Tightening Will Boost Term Premium

Expectations of a September Fed rate hike have continued…

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